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Winding up petitions within construction contracts

October 2017 - Issue 98

Under s122 of the Insolvency Act 1986, a creditor may apply for the winding up of a company if it can be proven that the company is unable to pay its debts. However, the recent case of Breyer Group Plc v RBK Engineering Limited [2017] EWHC has re-enforced the point that winding up applications should not be submitted as a means to enforce a debt within construction contracts. In Breyer, a winding up application was struck out as an abuse of court process.

Breyer Group Plc had entered into a sub-contract with RBK Engineering Ltd stipulating certain conditions to be satisfied prior to payment being made.

Submission of the winding up petition

On 2 February 2017, RBK issued a final application for payment, and subsequently a dispute arose regarding the date Breyer issued a payment notice. Due to an outstanding payment of £258,729.16 being owed by Breyer, RBK issued a winding-up petition on the grounds that Breyer was unable to pay its debts as they fell due.

Application to strike out the winding up petition

Breyer denied that it was unable to pay its debts and stated that it was merely disputing the sum in question. Breyer argued that it had defences to the claim, along with a counterclaim, and that the winding up proceedings were likely to have an unnecessary negative impact on its business.

The application to strike out the winding up petition was granted in favour of Breyer. The court was provided with evidence of the company’s financial background and its current activity in the construction industry, as a result of which the court felt it was clear that Breyer had the financial ability to pay the sum claimed in the petition.

The court further agreed that there was a “genuine dispute as to the terms of work” between Breyer and RBK. There had been concerns regarding the quality of work carried out and a range of reasonable defences to the claim, along with potential counterclaims.

A winding up petition can only be submitted by a creditor and, given the existence of the disputes, the court was not satisfied that as at the date of the winding up petition, RBK was in fact a creditor with grounds to present the petition.

Further, the contract between the parties also contained a clause providing that any dispute between the parties be referred to adjudication in accordance with Part 1 of the Schedule to the Scheme for Construction Contracts (England and Wales) Regulations 1998. It was adjudication, rather than the use of a winding up petition, that was an appropriate route of redress where there is a genuine dispute in relation to a construction contract.

The courts subsequently held that the winding up petition was an abuse of court process, on the grounds that alternative dispute resolution methods were available, and a winding up petition can “operate as a form of commercial oppression”. They were of the view that construction disputes of this nature are not suitable for insolvency proceedings.